Thursday, June 28, 2012

Umm... I realise I am walking into something of a minefield here. And I really don't want to indulge in psychobabble- I never set much store by it anyway. However, since the question has been asked and answered in ways that I do not find persuasive, I thought it was worth a brief comment.

To say that Rajat Gupta was greedy is a non-statement- the rest of us are not angels anyway. If we accept that living is, for the most part, one big ego trip, then it's impossible to keep greed out of the equation.

Some would argue that the issue is not greed per se. It is greed that goes beyond reasonable bounds, whatever these are. This is the line that most critics of Gupta have taken. He was alright during his McKinsey days, his downfall began when, in the company of fund managers and other Wall Street types, he began to entertain visions of moving from being a multi-millionaire to a billionaire. That is when things began to wrong. He would have been okay had he stuck to his multi-millionaire status, his mansion and three apartments. All of us need to survive, you know.

The inference, of course, is that people at the top who don't fall into this trap are people who have "managed" their greed- I teach at a b-school, so I guess I should be using the right expressions. That is how they end up as decent, law-abiding, tax-paying, non-insider trading citizens.

It was left to John Gapper of the FT to prick this delusion in an incisive article:

Like
politicians, executives who reach the top are not saints – they must
build alliances, defeat rivals and be highly ambitious. They may behave
with nobility once in the job but that is not how they got there.

Studies have found that many executives share qualities with
psychopaths. One study of British managers identified similar traits in
both – superficial charm, grandiosity, lack of empathy,
manipulativeness. These flaws, far from holding them back, had helped
them rise.

There you have it. Being at the top in the corporate world is not about higher values or concern for mankind, much less about being a balanced guy with lots of inner harmony. It is the ruthless pursuit of self-interest, the indulgence of greed in every way, that takes people to the top. In the process, some transgress the law in obvious ways, some in not-so-obvious ways, and a great many are blind to any moral code but cannot be said to have violated laws. Again, some get caught, others don't.

Viewed thus, what happened in Gupta's case represents a continuum, not an abrupt discontinuity. His misfortune was that he happened to get caught. There must be many like him whom people still queue up to listen to, shake hands with, are eager to write about.

I will leave you to ponder Gapper's unsettling punchline:

The nastiest conclusion is that the “norms and expectations” of the
corporate elite are corrupt – that at such heights, illegal
information-sharing is no big deal.

Thursday, June 21, 2012

The rating agencies have never been kind to India. Through the nineties when we were growing at more than 6%, we were regarded as below investment grade. It took several years of growth of 8-9% for S&P to upgrade us to investment grade in 2007. Today, we are BBB-, just one notch above below-investment grade, the same as Iceland (which went through a frightful financial crisis recently). We are two notches below Ireland (yet to recover from a banking crisis) and Spain, which has just received a bailout. Beats me.

Now, S&P has warned India of a possible downgrade further ahead unless it gets its act together. India's external debt to GDP of 3.4% is among the lowest in the world. We have not defaulted on our foreign obligations all these years and are unlikely to do so even if growth slows to 6% in the next year or two years. We are among the few nations whose debt to GDP ratio has declined in recent years. What, then, is the basis for S&P's warning?

I visited the S&P website to understand their rating methodology for sovereigns. They use a combination of political, economic, external, fiscal and monetary scores. Even if one parameter, the external score, looks good,your rating can go down if the other scores worsen. Let's say that an unwieldy coalition looks likely to assume power in Delhi. The political score would worsen and you could get a downgrade- so I understand their methodology.

In India's case, this approach looks suspect because the link between a worsening of various scores and default probability is weak. Politics could get more contentious; reforms may grind to a halt; the monetary authorities may not have room to lower interest rates. But this does not increase the probability of default on foreign obligations because external debt is so low.

This is not the only argument I would make. I do not believe that the link between political regimes or even economic regimes and growth in India is all that strong. If the global situation improves, the present set of reforms could easily give us 7.5-8% growth; if the global situation remains bad, some of the reforms people are talking about will not make a big difference.

Wednesday, June 20, 2012

One question that is being asked after the conviction of Rajat Gupta is: why did he not settle when the SEC brought an administrative action against him? He would have paid a fine and been barred from securities trading but would have kept his freedom. Maybe he thought he could hired the best legal brains to get him an acquittal? A recent article in ET makes clear that the odds were against him: only 1% of defendants in the US get acquitted; 89% settle with the prosecution. The trial has also cost Gupta serious money: $30 m so far (paid for by Goldman Sachs but refundable in the event of conviction).

The silver lining, as a story in ET suggests, is that Gupta may get a relatively light prison sentence, say, three years. Judge Rakoff is known to given lesser sentences in such cases than what the prosecutors have recommended. In one recent case, he handed out a four year prison term against the maximum of 10 years.

Outside the confines of the courtroom, he has demonstrated a work ethic
at least as rigorous as the bankers and consultants parading through the
witness box, seeming to break only to watch the New York Yankees (which
he encouraged jurors to do as well). In response to a tricky legal
issue raised on a Friday, he requested that briefs from the opposing
counsels be brought to his chambers on Saturday, and he delivered an
opinion when the court reopened on a Monday.......

....Perhaps because of his willingness to work long hours and grapple with
areas of law that others have circumvented, Mr Rakoff has produced a
remarkably large amount of work over the past five years—six times the
number of opinions by another longtime judge in the same district, and
more than double the number of several others....

I have read a fair bit about World War II and seen some excellent documentaries. Nevertheless, some of the facts and figures about the human costs of the war, mentioned in two books reviewed by the Economist, came as a revelation:

70 m deaths of which two-thirds were non-combatants

15 m Chinese deaths and 27 m Soviet deaths ( I was aware of the latter but not the former)

Red army soldiers chopped of the legs of dead Germans. They wanted the boots which could be had only after the legs had been defrosted

Outside Leningrad, scene of one of the epic battles of the war, amputated limbs were stolen from hospitals and corpses from mass graves to be used as sources of food

In Leningrad city itself, 2000 people were arrested for cannibalism; children were at risk of being eaten by their parents

The Japanese threw thousands of prisoners into burning papers and killed locals for meat

The Soviet army, fighting its way to Berlin, raped an estimated 2 m women and girls.

In sheer scale of brutality, World War II has few parallels in history.

I liked the reviewer's criticism of one of the book's praise of the fighting qualities of Soviet, Japanese and German soldiers compared to those of the allies:

Mr Hastings’s repeated admiration for the fighting qualities of
German, Japanese and Soviet soldiers compared with British and American
forces is especially trying. Germany and Japan were militarised
societies that glorified war and conquest, held human life to be cheap
and regarded obedience to the state as the highest virtue. Russian
soldiers were inured to the harsh brutalities of Soviet rule and driven
on by the knowledge that they were fighting “a war of annihilation”
against an implacable enemy. If they wavered, they knew they would be
shot by NKVD enforcers. More than 300,000 were killed pour encourager les autres.

The majority of the civilian soldiers of the Western democracies, by
contrast, just wanted to survive and return to normal life as soon as
possible. That also meant that American and British generals had to
eschew the dashing aggression of their Russian and German counterparts,
who could squander lives with impunity.

Sunday, June 17, 2012

I am not much of a movie buff and certainly no fan of Bollywood. And yet I found myself at a theatre yesterday watching the newly released Ferrai Ki Sawari produced by Vidhu Vinod Chopra. It struck me as low-budget film: just two actors, Sherman Joshi and Boman Irani, and no actress (except for a guess appearance by Vidya Balan). No expensive locations or sets either.

I watched the film with some disbelief. I could not have imagined that, in this day and age, Bollywood was capable of producing such trash. The story is about a Parsi father (Joshi) trying to get his small son a break in cricket by enrolling for a training programme at Lord's. A lady promises him the fee for the programme if he can arrange to get Sachin Tendulkar's Ferrari for the wedding of the son of a municipal corporator. Joshi manages the feat in ways that would be credible only in Bollywood. He manages to have the Ferrari returned again in ways that would be plausible only to those mentally challenged.

Joshi plays the doting father. He seems to make the mistake of confusing simplicity or straightforwardness with appearing moronic- you can be straightforward without wearing an asinine smile all the time or rolling your eyes. Irani is his gifted self as a grandfather who never quite got the chance he deserved as a cricketer in his time. The politician/municipal corporator and his imbecilic son are horrors that only Bollywood can produce. The child artiste is the redeeming feature.

If there is a message in the movie- and it would take some effort to extract any from this movie- it is that politicians rank at the bottom in the esteem of the public. Bollywood, with its appalling stereotypes, is itself responsible for the complete lack of respect today not only for politicians but, alas, for the democratic process itself.

The UPA's choice of Pranab Mukherjee as its presidential candidate has been well received not only in political circles but in the country at large. It's hard to think of many people with credentials comparable to Mr Mukherjee's- or with such broad acceptability. If Mukherjee does make it to Rashtrapati Bhavan- and this looks highly probable now- it would show that, for all its contentiousness, the Indian political process is capable of throwing up the right choice.

Two other comments on this issue. One, the discussions in the political class highlighted the complete disconnect between the social media- the Internet and Twitter crowd- and the political class. The social media had been pushing for a non-political person. Some of the names one came across: N R Narayana Murthy, E Sreedharan, Ratan Tata and even Anna Hazare. In the last few weeks, as the race hotted up, not one of these names was mentioned even in passing in political circles. Whatever the differences amongst them, politicians are united in believing that the president should be somebody with a political background. (Kalam qualifies now as he has been president and I guess he qualified earlier as somebody who held a position in government for very long). In this, I believe the political class was entirely right. The havoc that a non-politician posing as a messiah can create is unimaginable.

Two, am I the only one disappointed with Kalam not shooting down his candidature? By convention, nobody has held the office for more than one term. Kalam is 81. It would be have been appropriate for Kalam to have declared at the very outset that he would not like to be considered. Instead, I understand from media reports that he is still keeping his options open.

Sunday, June 10, 2012

When you say America is a $14 trillion economy (India is approaching $2 trillion), it doesn't quite give you a sense of America's industrial might. Reviewing a book on the crucial role of America's industrial might in World War II, the Economist mentions a couple of interesting facts. In 1944, the US produced a plane every five minutes, 50 merchant ships and eight aircraft carriers a month. India commenced work on its first indigenous aircraft carrier in 2005 and it is to be commissioned in 2014! And how many fighter planes have we produced in the last 65 years?

Now, you know why talk of India becoming a superpower is poppycock. And why China is furious with American plans to move 60% of its naval strength to the Asia-Pacific region, from the current 50%

Friday, June 08, 2012

My post below on the Eurozone impact on India has drawn jeers from some readers consequent to the latest GDP data becoming available. I am asked whether I stick to my 7% forecast. Another reader warns me that I will have to swallow my words. I accept these comments in all humility.

But that is not to say that I feel the need to change my position. If anything, the low base of 2011-12 improves the chances of 7% growth in 2012-13. That apart, the depreciation of the rupee and the decline in oil prices are positive factors in the present environment.

What do we make of the sequential decline in growth over the last four quarters? I am still not persuaded that major errors of policy have contributed. Most people point to the fiscal situation and say that the government's basic orientation towards higher social spending and reluctance to rein in subsidies has led up to the present situation where a high fiscal deficit along with high inflation limit the scope for RBI to cut interest rates and stimulate investment.

A very basic conundrum remains, however. The overall investment level is close to 35%. Why is this level of investment not producing growth of 8% this year when it did so in the past eight years except for 2008-09, the worst year of the financial crisis? That tells me that the fundamental factor in 2011-12 that impinged on growth in 2011-12 must be similar to that in 2008-09, and that would be the Eurozone crisis. It cannot be any of the policy factors that most commentators point to. Add to this delays in approvals of projects at a time when the anti-corruption crusade has created a fear psychosis and supply bottlenecks in coal and power sectors, and you have an explanation for the slide this year.

It follows that if the supply bottlenecks are sorted out to some extent, and fiscal correction paves the way for a further cut in interest rates, the growth rate should be better in 2012-13, without any of the 'big bang' reforms people are talking about. Maybe the stock market has caught on to this possibility in recent days?

Wednesday, June 06, 2012

FT has analysed the share of bankers' pay in relation to profits at the top 13 international banks. One would have thought that, in this adverse environment, banks would respond by reducing rewards to bankers so that shareholders' returns are protected? But no! Bankers' rewards have increased while that of shareholders has fallen.

Here are facts in the FT story:

staff costs accounted for more than 81 per cent of the total (of staff costs and net profits), compared with a pre-crisis tally of 58 per cent

Dividends are came down to 4.5% of the pot compared to 15% earlier

In the period under consideration, banks' share prices slumped nearly 60%

After the sub-prime crisis, the focus has been on the design of compensation, how to ensure that compensation schemes, such as stock options, do not increase firm- and systemic risks. It is becoming clear now that this will not suffice. The absolute levels of pay have to be tackled because bankers seem to think that banks exist for themselves first, next for shareholders. This would have been an egregious position to take at any time; it is more so when banks have had to be helped out with taxpayers' money. (Caveat: One to examine whether some problems are distorting the overall results or whether the trends indicated above are common to most banks).

This is not a situation that can be remedied by market forces'. The fact that such distortions exist points to the absence of adequate competition and also to a failure of governance. Time for the regulators to step in and check pay excesses in banking.